The President of COP28, His Excellency Dr Sultan bin Ahmed Al Jaber, has emphasised the urgency for governments to acknowledge their shortcomings in addressing climate change. I am in total agreement. November 2023 should mark a turning point when global governments cease their disagreements over energy transition obligations.
Instead, they should demonstrate clear, concrete initial steps that indicate a commitment to reforming future energy markets. However, fossil fuel companies and their investors continue to act at their pace, not that needed to meet global net zero aspirations.
Confronting the industry
The oil and gas industry has substantially fulfilled global energy demand. However, transitioning to cleaner, sustainable energy sources necessitates a swift departure from fossil fuel dependency. The EI Statistical Review of World Energy tells us incumbent fossil fuels continue to account for more than 80 per cent of global energy consumption, with growth in renewables over recent years barely denting that dominance.
And relying on even the most forward-thinking oil and gas companies’ shareholders will only yield limited progress that will fall short of our goals.
There’s no denying that the oil and gas industry must continue to exist for some time. However, we should be more critical of its unsupported claims about accelerating the energy transition. Despite its unquestionable technical and financial capabilities, evidence indicates otherwise.
Delayed action on oil and gas production-related emissions such as methane – a greenhouse gas with a warming effect 84 times more potent than CO2 – plus recent pullbacks from green energy investments by major oil companies prove this point beyond doubt.
Relying on even the most forward-thinking oil and gas companies’ shareholders will only yield limited progress that will fall short of our goals.
In the context of ever more devastating climate impacts in geographies around the world, I have therefore come to the conclusion that a new approach is needed to remove this inertia. Regulators should contemplate restricting oil and gas companies from directly investing in clean energy. Instead, they should facilitate the creation of an independent capital pool for projects that are insulated from hydrocarbon-based development activities.
Simplifying this, regulators should implement mechanisms that enforce the use of entirely separate corporate balance sheets that are independently and adequately financed. This doesn’t preclude oil and gas companies from investing in the new entities that emerge as a result, but it does introduce different strategic investment focus and decision-making parameters.
Potentially, it also offers regulators a way to directly incentivise or penalise activity relating to the hydrocarbon industry’s performance in the energy transition space.
Separating the balance sheets of traditional energy from clean energy is a step that regulators worldwide can, and should, undertake immediately. While complex, I believe this action will considerably accelerate the pace of the energy transition in all parties’ interests.
Failure to take this action will potentially diminish, if not obliterate, the economic wealth and quality of life that human endeavour has built, largely powered by the hydrocarbon industry that we now need to transition away from.
Natural resources and the circular economy
Global regulators should also address the structure of the commoditised energy and mineral resources’ markets. These markets need to be reconfigured to incorporate the real costs of environmental externalities that we’ve ignored for far too long.
How can we rectify a world where energy and mineral resource producers, developers and traders are valued based on the volumes they exploit, without any direct accountability for how these resources are efficiently utilised?
In the future, these organisations should have a vested interest in ensuring their end-use customers use these resources more efficiently, minimise waste and recycle whenever possible. This should become a key determinant of their future licence to operate.
One viable mechanism to foster greater circularity could be the introduction of what I have termed a Circular Economy Revenue Tax (CERT). This tax would be levied on all exploiters and traders of natural resources, with the income directed to resource efficiency and recycling projects.
The percentage revenue raised by such a tax could vary based on the type of resource, regional, and national economic circumstances. These funds should be allocated solely for promoting resource-efficient utilisation and improved recycling of these resources. A global multilateral agency, such as the United Nations or World Bank, would need to provide appropriate governance for the disbursement of the funds.
The intricacies will be complex, but if governments agree that implementing this basic idea is worthwhile, even with a modest percentage levy, it could begin to set a precedent that could disrupt the current structure of commoditised resource markets and promote more circular economies.
Four decades ago, when I joined the oil and gas industry, I took pride in the genuine efforts companies like mine took to mitigate the environmental impact of the then-developing offshore oil and gas industry.
Now, employees of many international energy and resource companies question their companies’ commitment to fulfilling their social licence to operate. Boardroom discussions are dominated by shareholder returns. This disheartens many employees, with some even leaving their positions due to their principled beliefs.
I eagerly anticipate whether the two propositions above can spark enough debate and dialogue to inspire real and meaningful action at COP 28!
Peter Godfrey is the Asia-Pacific managing director of Energy Institute. This article first came out in the Energy Institute. The views and opinions expressed in this article are strictly those of the author only and are not necessarily given or endorsed by or on behalf of the Energy Institute.
Did you find this article useful? Join the EB Circle!
Your support helps keep our journalism independent and our content free for everyone to read. Join our community here.